An alternative approach
For many investors, a combination of term life insurance and mutual fund
investments may offer a more flexible solution. “Term insurance provides high life
cover at low cost, while mutual funds invested through systematic investment
plans (SIPs) offer better liquidity and possibly higher returns over the long term,”
says Kumar. In the event of the parent’s death, the term plan payout can fund
education and other goals.
Who should consider them
Despite their limitations, some people may go for child plans. “Child plans suit
risk-averse parents with limited discipline who prioritise guaranteed coverage and
peace of mind over returns,” says Kumar.
Ranjit Jha, managing director and chief executive officer, Rurash Financials, says
these plans work for parents with a steady income who are serious about planning
for their child’s education.
Jha suggests checking whether the waiver of premium benefit is available and
whether the payout schedule is flexible and meets the child’s needs. He also says
the insurer’s claim settlement track record deserves attention.
Points to remember
These plans, if purchased, should be bought early. “Buy them as early as the child’s
birth or latest by the age of five,” says Mall. Starting early allows time and
compounding to work in favour of the investor. Starting late means higher
premiums and less benefit from compounding.
Jha cautions that parents must realistically estimate future education costs and
factor in both general and education-specific inflation. Market-linked options
require a longer horizon and regular monitoring to ensure performance stays
aligned with rising costs.
Finally, investors should not treat child insurance plans as pure investment
products. The returns from these plans, especially the traditional variant, are likely
to fall short of the returns from pure investment plans, as they are a mix of
protection and savings. Jha also emphasises comparing options across insurers
instead of buying the first plan that is pitched.
The writer is a Mumbai-based independent journalist
Charges and other key checks
Key charges that must be checked include premium allocation charges,
administration fees, fund management costs and mortality charges
Unchecked charges can materially reduce long-term returns
Clarify surrender charges.
Enquire about the impact of early exit